Sesa Sterlite (SSLT) can deliver on growth in FY16 in multiple areas, including (i) ramp-up of aluminum smelters, (ii) zinc operations, (iii) power business and (iv) restart of iron ore mining. While obstacles remain in these businesses, growth objectives can be met through a combination of internal initiatives and a more supportive external environment. Auction of natural resources (bauxite) by government can be an additional catalyst. The stock trades at 5.5x Ebitda (attributable) and 0.7x P/B (price-to-book value) on FY16e financials. Maintain Buy rating.
Aluminum ramp-up challenges to ease: Sesa Sterlite will raise its FY16 aluminum smelting capacity to 1.7 mtpa from 0.75 mtpa, led by commissioning of Balco’s smelter (325 ktpa—thousand tonnes per annum) and 50% of the 1.25 mtpa capacity in Jharsuguda.
Alumina: SSLT expects to receive the environmental clearance (EC) for Lanjigarh alumina refinery’s debottlenecking project to increase capacity to 2 mtpa from 1 mtpa after an expert committee recommended in its favour. Aluminum operations will require 3.4 mtpa of alumina based on FY16 exit smelting capacity of 1.7 mtpa. This will be met by 2 mtpa of captive alumina and 1.4 mtpa from imports. The eventual plan is to increase the alumina capacity to 5 mtpa as envisaged for the 2.3 mtpa aluminum capacity subject to EC.
Power: SSLT does not expect power usage for Jharsuguda aluminum smelter to be a concern despite the ‘IPP (independent power producer) status of the 2,400 MW power plant. Per management, the power plant will be classified as captive under the Electricity Act by virtue of (i) more than 51% of electricity being consumed for captive purposes and (ii) >26% ownership in the power plant.
Coal: The coal sourcing challenges at Balco will reduce after it won Chotia and Gare Palma IV/1 mines with 7 mtpa of operational mining capacity. These mines are located within 70-160 km and will require upfront capex of R2.5 bn only. The Jharsuguda power capacity has only partial linkages, but is counting on auctions.
Volume growth at Zinc India to be driven by SK, RA mines: While completion of the expansion projects at Zinc India by FY19 will raise mined metal volumes to 1.2 mtpa from 880 ktpa, HZ (Hindustan Zinc) expects moderate volume growth in the interim years. HZ’s shaft sinking at SK (Sindesar Khurd) mine is ahead of schedule and reached a depth of 1,000 metres (out of 1,050 mts). This will raise ore mining at SK to 3 mtpa in FY16 from 2 mtpa. The deepening to RA (Rampura Agucha) open cast mine by 50 mts to the ultimate depth of 420 mts will increase open pit mine life. We expect mined volumes to increase to 932 kt/986 kt in FY16/17e from 873 kt in FY15e.
Free cash-flow generation to improve: SSLT has lowered its capex guidance for FY15/16e to $1.5 bn/$1 bn from $1.9 bn/$2 bn, respectively. The capex guidance has been mainly cut for (i) oil and gas to $0.5 bn from $1.2 bn in FY16e and (ii) zinc to $0.3 bn from $0.5 bn by deferring a large part of Gamsberg capex to later years while sticking to original time lines. The revised capex numbers will improve the cash-flow for SSLT; which generated operating cash flows of $2.6 bn in 9MFY15 and free cash flow of $835m post interest and capex.
Zinc International—Gamsberg to the rescue: While Zinc International will be able to push back mine life at its Skorpion mine from 1.5 years to 3.5 years (closer to FY20) by exploiting new reserves, the Lisheen mine will close in October 2015 due to exhaustion of mine reserves. The Gamsberg project has a potential of 250 ktpa of zinc metal-in-concentrate and can take the Zinc International’s volume back to +300 ktpa levels, compensating for the loss of Lisheen volumes.The Gamsberg project will have a life of 13 years with scope for 150 mt extra resources. The company expects to commission the project in 2018. The total capex for it will now be $630m. The project is yet to take off on the ground. The Gamsberg project is the world’s largest undeveloped zinc reserves and mining is further scalable, taking the total capacity to +450 ktpa from 250 ktpa.
Power—Talwandi Sabo and Balco ramp-up to aid FY16/17e: SSLT will ramp up 2,580 MW of new commercial power capacity in FY16 at Talwandi Sabo and Balco. On this, SSLT has entered long/medium-term sale arrangements for 2,300 MW and has 70% of coal security though CIL linkages.
Iron ore—Karnataka mining restarts and hopeful on Goa: SSLT resumed its mining operations in Karnataka from February-end. It expects to produce 0.7 mt in Q4 with sales of 0.2 mt. In Goa, the mining leases for pre-ban mining capacity of 15.3 mtpa have been renewed and only environment ministry approval is left. While the low-grade ore from Goa. mostly exported, won’t be profitable at 30% export duty, SSLT is hopeful of a duty waiver.